BOC to keep policy rates unchanged, sell the Loonie - TDS

Analysts at TD Securities (TDS) offer their insights on today’s Bank of Canada monetary policy decision and its impact on the Canadian dollar.

Key Quotes:

“BOC to keep policy rates unchanged 

Although the Bank will no doubt continue to emphasize a gradual normalization path with a heavy focus on data dependency, we expect the Bank will be encouraged by economic data over the last six weeks. Notably, the housing market has attained a modicum of stability, while Poloz has consistently stated that the Bank will only incorporate tariffs into their forecast when they are implemented. Consequently, we expect to the communique to have a relatively optimistic tone. 

Residual expectations for a September rate hike almost entirely disappeared after the slightly below consensus reading on Q2 GDP, but markets are still firmly anchored around tightening in October. We expect the September communique to effectively (though not explicitly) affirm market expectations. 

We think it is time to hit the sell button on the Loonie, reflecting a washout in positioning and a fully priced October hike. A break of 1.31 in USDCAD opens up some space to re-test 1.33, especially if the NAFTA can get kicked down the road (or worse). We hold long exposure to EURCAD in risk reversals and like selling CADNOK and CADJPY in cash.”